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Developer Makes a Bet on Prairie-Home Boom

Related Paid $300 Million for Apartments in Texas, North Dakota

 This article was reposted from the Wall Street Journal on March 18, 2014. It was written by Craig Karmin and Eliot Brown

A two-bedroom recreational vehicle at North Dakota Housing’s RV Park in Watford City rents for $2,350 a month.  -North Dakota Housing

Related Cos., the developer best known for luxury condominiums and big commercial projects, is turning its sights to low-slung apartments on the North Dakota and Texas prairie, where a shortage of housing tied to the energy boom is allowing landlords to command some of the highest rents in the country.

The company, run by Miami Dolphins owner Stephen Ross, last week paid around $300 million for 20 apartment complexes with 3,000 units in Midland and Odessa, Texas, according to people familiar with the transaction. It also is in advanced talks for a deal on an existing project in North Dakota’s Bakken region, and plans to raise up to $300 million for a fund focused on shale-rich communities from desert areas near the Mexican border to the Appalachian basin in the East, the people said.

Mr. Ross is following a small band of investors, including private-equity giant KKR & Co. and real-estate firm Westport Capital Partners, into the residential and commercial markets of new and resurgent energy towns a world away from the cities and suburbs where they usually build or buy. They are drawn by rents that would seem more reasonable in Midtown Manhattan and Silicon Valley, the result of almost nonexistent unemployment and low supply.

A two-bedroom apartment in Williston, N.D., for example, can go for $3,000 a month, or more. In nearby Watford City, North Dakota Housing LLC rents a two-bedroom trailer for $2,350 a month. The same rent could fetch a spacious luxury apartment in cities like Las Vegas or Phoenix, or a studio in new towers in New York.

“We think it’s a unique opportunity,” says Justin Metz, managing principal of Related’s fund-management group.

The boomtowns in Texas have been around since oil-drilling rushes of previous decades, but those in North Dakota began sprouting about five years ago as energy companies started to pull oil and natural gas from shale-rock formations through a process known as fracking. Their populations have skyrocketed, overwhelming the existing housing stock. Many workers continue to be housed in barrack-like “man-camps.” While riding a boom is risky, investors point out that they are getting compensated with high yields. For example, Related is expecting the initial annual income from the apartment portfolio it purchased last week will be more than 10% of the purchase price, according to people familiar with the matter.

By comparison, investors on average are getting a yield of about 6% on rental-apartment acquisitions and that figure can dip below 4% in major cities like New York, according to data firm Real Capital Analytics. “Typically, pricing gets ahead of real-estate fundamentals,” says Mr. Metz of Related, referring to high employment and rapid economic growth in the oil and gas-rich regions. “Here you have strong real estate fundamentals and pricing hasn’t caught up with it yet.”

Still, some analysts are warning that job growth eventually will level off and begin to fall after the initial labor-intensive effort of drilling wells is complete. Employment in the rapidly growing petroleum sector of the North Dakota Williston Basin, for instance, is projected to rise from 14,153 in 2009 to more than 53,000 in 2020, before falling to 40,000 by 2030, according to North Dakota State University’s Department of Agribusiness and Applied Economics.

Meanwhile, developers already are adding to supply, causing Moody’s Investors Service last month to issue a report warning that rents in North Dakota boomtowns are “well above sustainable” levels. “It really intrinsically doesn’t make sense for a town with no physical barriers to entry to command the same rents as New York or San Francisco,” says Tad Philipp, director of commercial real-estate research at Moody’s Investors Service.

Not all bets have been winners. For example, Flathead Glacier Group LLC, a Bozeman, Mont., real-estate company, defaulted on a $24 million loan backed by 134 rental apartments in Williston and Watford City just four months after it was sold into a mortgage bond, according to Trepp LLC. Last week, Trepp reported the loan went to 90 days delinquent from 60 days. Inquiries to Flathead were directed to a firm run by loan sponsor John Dunlap, who didn’t respond. But a spokeswoman for Halliburton Co. confirmed that it terminated its lease for 40 units owned by Flathead in August when Halliburton completed construction of housing for its workers in Williston.

Still, many investors and planners believe it could be years more before supply catches up with demand, pushing rents down. For some of the early real-estate investors in the latest boom, cash is pouring in as rents rise. Average rents in Williston have risen from about $1,000 a month in 2009 to nearly $2,500 at the end of 2012, the latest available data, according to the Williston Regional Economic Development Corp.

KKR was one of the first big-name investors to show up, announcing a 164-acre master-planned community in Williston in 2012. The private-equity firm expects to complete this summer eight rental apartment buildings on the site. The apartments have been coming to market gradually and KKR officials say they are leasing 20 to 25 a week. KKR and its partners are spending about $150 million to build the apartments, and to prepare vacant lots that they are selling separately to home builders.

Follow this link to the article: http://online.wsj.com/news/articles/SB10001424052702303287804579447463140236306?mg=reno64-wsj&url=http%3A%2F%2Fonline.wsj.com%2Farticle%2FSB10001424052702303287804579447463140236306.html&fpid=2,7,121,122,201,401,641,1009

Write to Craig Karmin at craig.karmin@wsj.com and Eliot Brown at eliot.brown@wsj.com

 

Best of Real Estate Matters

Best of Real Estate Matters #1: The Little Idea That Could: The untold story about the development of Target Field

Target Field BlogWhile the local news is filled with stories about where the Vikings, law makers, mayors and developers want to see the proposed new stadium, the story of the development of Target Field is an interesting one to review. The most popular (most viewed) post of 2011 was:

Best of Real Estate Matters – #1: The Little Idea That Could: The untold story about the development of Target Field

Bruce Lambrecht and Dave Albersman are back at it in building another “little idea that could” – this time for the Vikings. Check out more of the story in this 2011 blog post: Looking for a Victory? The Vikings May Want to Try Left Field…  Although the plans have changed and evolved since this post was written in early 2011, it will be interesting to see where Lambrecht and Albersman play into the Vikings Stadium decisions.

Commercial Real Estate, Development, Green Building, Industry News, Real Estate Trends, Uncategorized

A Fresh Vision for Richfield: Redeveloping the Lyndale Garden Center Site

When it comes to development, Colleen Carey, President of The Cornerstone Group, doesn’t believe in just razing one property to replace it with a run-of-the-mill mixed use concept.  Rather, her goal is to “transform the spaces that surround us into spaces that inspire us.”  Her upcoming project, which will transform an abandoned retail site on a core section of Lyndale Avenue in Richfield, will accomplish her company’s mission with a variety of unique components that connect housing and retail with principles of sustainability, community, and the arts.

The ambitious project involves several stages; first, there are new retail tenants to secure and a dilapidated greenhouse to rehab.  Carey’s ideal tenant mix includes a natural foods grocer and boutique retail, a local café, and she is exploring the idea of having a farmer’s market – either indoors or outdoors on the site.  Also incorporated in the former Garden Center building will be community space including room for performance arts.

The Cornerstone Group's Site Plan for the Lyndale Garden Center Redevelopment in Richfield, MN

The Cornerstone Group's Proposed Site Plan for the Lyndale Garden Center Redevelopment in Richfield, MN

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Appraisal, Business Valuation, Commercial Lending, Commercial Real Estate, Development, Property Management, Real Estate Trends, Residential Real Estate, Retail Real Estate, Uncategorized

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